What is FATCA
The Foreign Account Tax Compliance Act (“FATCA”) is a seminal piece of legislation being implemented by the United States (“US”) which has significant implications for its citizens and other US tax residents, in particular those with foreign accounts and assets outside of the US, and also for many entities dealing with such citizens.
Aim of FATCA
The primary aim of FATCA is to cause foreign entities to identify and report specified information to the United States Inland Revenue Service (“IRS”) about US tax payers with foreign accounts and assets. Such information is to be used by the US to better assess taxes due and more specifically to limit potential tax evasion by its citizens and residents. Foreign based entities which fail to comply with FATCA could be subject to a 30% withholding on US sourced payments.
BVI and US Intergovernmental Agreement
On June 30, 2014 the British Virgin Islands (“BVI”) signed a Model 1B Intergovernmental Agreement with the US in relation to FATCA (the “BVI IGA”). The BVI IGA allows BVI based entities to report their US account holders’ information to the BVI Government via the BVI International Tax Authority (“BVI ITA”) which will then report annually to the IRS. One key benefit of this model is that BVI based entities which are liable to report under FATCA will not have to report directly to the IRS but rather to the BVI ITA. Another significant benefit is that BVI based entities which are liable to report under FATCA are deemed compliant under FATCA and will therefore avoid withholding.
On July 19, 2014, the BVI Government issued its Draft Guidance Notes on FATCA (the “Draft Guidance Notes”). The Draft Guidance Notes explain a host of matters in terms of how FATCA will work as it relates to BVI based entities, but again this is a draft and is therefore subject to change.
The BVI IGA is approximately 56 pages and the Draft Guidance Notes is approximately 156 pages. This summary therefore does not purport to be comprehensive but merely seeks to highlight the main issues surrounding FATCA and its BVI implications.
Who will report information under FATCA / Entity classification
The BVI IGA applies to all BVI Financial Institutions. The BVI IGA defines the term “Financial Institution” as a Custodial Institution, a Depositary Institution, an Investment Entity, or a Specified Insurance Company. Each term is further defined below:
“Custodial Institution” (under the BVI IGA) means an entity that holds, as a substantial portion of its business, financial assets for the account of others. An entity holds financial assets for the account of others as a substantial portion of its business if the entity’s gross income attributable to the holding of financial assets and related financial services equals or exceeds 20 percent of the entity’s gross income during the shorter of: (i) the three-year period that ends on December 31 (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or (ii) the period during which the entity has been in existence.
“Depositary Institution” (under the BVI IGA) means any entity that accepts deposits in the ordinary course of a banking or similar business.
“Investment Entity” (under the BVI IGA) means any entity that conducts as a business (or is managed by an entity that conducts as a business) one of more of the following activities or operations on behalf of a customer: (i) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; interest rate and index instruments; transferable securities; or commodity futures trading; (ii) individual and collective portfolio management; or (iii) otherwise investing, administering or managing funds or money on behalf of other persons.
“Specified Insurance Company” (under the BVI IGA) means any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract (each as defined under the BVI IGA).
Under the BVI IGA, a BVI Financial Institution (“BVI FI”) will be required to, among other things, identify and annually report certain details of US accounts (e.g., names, address, tax identification number, account balances, and beginning with the 2015 calendar year the income earned).
Again, the BVI FI will report this information to the BVI ITA, not directly to the IRS.
An entity that is not a BVI FI is a BVI Non-Financial Entity (“BVI NFE”) and has no reporting obligations in respect of US persons to the BVI ITA or to any other foreign government.
The key in determining an entity’s reporting obligations under FATCA is to therefore determine whether it is a BVI FI or a BVI NFE. It should be noted that a BVI NFE will still need to complete a W-8BEN-E form and provide it to counterparties to avoid withholding.
FATCA’s application to BVI based entities
The application of FATCA to BVI service providers, companies and trusts are of primary concern. Below is a brief look at the various types of entities and how they may be affected.
BVI licensed banks would certainly fall within the category of Depositary Institutions and also potentially Custodial Institutions. Accordingly, they will need to report US account holders’ details to the BVI ITA pursuant to the BVI IGA.
B. Registered Agents
Registered Agents who provide registered office related services only for BVI companies would not fall within the category of either a Depository Institution, Custodian Institution, Specified Insurance Company or an Investment Entity. However, companies for which Registered Agents provide registered office related services could fall within the above-mentioned categories of Financial Institutions, and those companies will need to determine their own FATCA classification.
C. Investment Funds
The prevailing view is that most investment funds fall within the BVI IGA definition of an Investment Entity and will therefore be treated as BVI FIs for the purposes of FATCA. Most investment funds are registering and are getting ready to report.
Most Investment Managers and Advisers will be deemed compliant if it is a BVI FI solely because it: (a) renders investment advice to, and acts on behalf of, or (b) manages portfolios for, and acts on behalf of a customer, for the purposes of investing, managing or administering funds deposited in the name of the customer with a Financial Institution other than a Non-participating Financial Institution (as defined under the BVI IGA).
BVI investment funds affected by FATCA should register and obtain a Global Intermediary Identification Number (“GIIN”) via the IRS FATCA website, review their offering and operational documents and implement a FATCA compliance program.
A trust is resident in the BVI if it has a trustee who is resident in the BVI, even if the trust has no BVI settlors, beneficiaries or protectors. Where the trustee is a corporate entity then it is resident in the BVI if it is incorporated, registered or licensed and includes all subsidiaries which are authorised to carry on business under that licence.
A trust which is BVI law governed but has no resident BVI trustee is not covered by the BVI IGA.
E. BVI incorporated companies
BVI incorporated companies generally will need to determine their own FATCA classification.
Given that a majority of BVI incorporated companies have no US beneficial owners then the majority will have nothing to do.
Those companies whose activities would result in them being classified as a Financial Institution should therefore register and obtain a GIIN and implement a FATCA compliance program. Depending on where the company actually operates it could make disclosures under another relevant FATCA agreement which may also be applicable. The Draft Guidance Notes addresses the issue by providing that if there is actual knowledge/confirmation that the entity has already reported under another FATCA agreement then it would not have to report via the BVI IGA.
The IRS FATCA website has been operational since the beginning of 2014 and is available for Financial Institutions to register for a GIIN. BVI FIs should register for a GIIN by December 31, 2014 to avoid the imposition of withholding tax from January 1, 2015.
Annex I of the BVI IGA also includes certain categories of account that do not need to be reviewed, identified or reported. These include: (a) a pre-existing individual account with less than US$50,000 as of June 30, 2014; and (b) a pre-existing entity account with less than US$250,000 as of June 30, 2014. Further, such pre-existing entity account does not need to be reviewed, identified, or reported until the account balance or value exceeds US$1,000,000. The deadline for reporting for the 2014 calendar year is expected to be by the end of the first quarter of 2015.
FATCA has far reaching effects globally and the situation is no different in the BVI. Entities that operate in or from within the BVI should ascertain their FATCA classification and take the appropriate action to become compliant. From a BVI perspective, however, since a vast majority of BVI based entities have no US beneficial owners and would not be classified as Financial Institutions for the purposes of FATCA, then a majority of them will not be affected by the reporting regime. Those that are affected should seek appropriate advice with a view to putting in place an appropriate FATCA compliance program.
For further information or should you have any queries on this topic, please contact Christopher Simpson (firstname.lastname@example.org).